A Boon For Telecom, A Break For Taxpayers

Ever since the early days of America, the nation has been giving away valuable assets to private interests. From the land rushes of the 19th century to the granting of free broadcast licenses, government has rarely tried to get a fair price for the public patrimony.

But the insatiable demand for revenue and growing insistence that government behave in a more businesslike fashion is bringing the giveaways to an end. Already, a bold experiment by the Federal Communications Commission to sell a chunk of the broadcast spectrum is setting off a mad scramble among companies looking to ride the hottest wave in communications. Next May, the FCC will open the bidding for licenses to provide Personal Communication Services (PCS), a form of wireless phone services that promises to be cheaper than cellular.

HORN OF PLENTY. The stakes are huge. Telecommunications experts expect the PCS market to be worth at least $100 billion in about a decade. The feds hope to reap $10 billion just from selling rights.

That's why companies are going to extraordinary efforts to plan for the auction. Even though the FCC won't decide on the details of the sale until February, MCI Communications Corp. has assembled a deep-pocketed consortium that CEO Bert C. Roberts Jr. hopes will allow the company to put together a national PCS network. To get ready, the No.2 long-distance company is running mock auctions at its Washington headquarters. A major goal of the drills: not to let emotion draw MCI into a ruinous bidding war. "It's been a learning experience," says MCI Vice-President Steven A. Zecola.

But the heat of the auction may make restraint difficult. The Baby Bells, all of which own cellular properties, will surely be aggressive bidders. AT&T hopes to buy enough PCS licenses to fill in regional gaps in its newly acquired McCaw Communications' cellular service. And startups, such as Washington Post Co.-backed American Personal Communications Inc., are trying to figure out how to get a piece of the action.

The structure of the auction also works against a rational approach. The biggest players are most interested in the two licenses that will be awarded in each of 47 major markets that blanket the U.S. But to ensure that smaller bidders will have a crack at licenses, the FCC is also offering five licenses in each of 487 smaller markets, which range from individual cities to big chunks of sparsely populated territory.

Together with the two existing cellular franchises, this scheme creates the possibility of nine competing wireless phone services in every market. That's likely to provide excess capacity even if PCS has the same explosive growth as cellular technology. The likely outcome will be a vigorous secondary market in licenses, with the MCIs and AT&Ts buying the rights of the smaller successful bidders. A similar phenomenon followed the issuance of cellular licenses a decade ago. But then, the government gave away the rights in a lottery, and all the profits went to the initial winners. This time, Uncle Sam is making sure he gets his share up front.

NO CRUMBS. Right now, the FCC is attempting to maximize its take. It's talking to investment banks--including Morgan Stanley & Co. and Goldman, Sachs & Co.--and even consulting with academic gaming experts to come up with an optimal process.

But in an important sense, the government is already a guaranteed winner. For the first time, the Treasury will be compensated for use of the broadcast spectrum, one of the nation's most valuable resources. The public will get a new and cheaper form of wireless communications. And if the sales produce anything close to the hoped-for return, look for many more auctions to come.